Why GoPro Stock Is Down and How We Called It

why GoPro stock is downGoPro stock is down a crushing 18% to $9.85 today (Friday) on dismal Q3 2016 earnings. Fortunately for Money Morning readers, we have been warning against buying GoPro stock since the IPO.

Before we get into how we predicted the GoPro Inc. (Nasdaq: GPRO) stock drop, here's a look at GoPro's disappointing Q3 results and the volatile reaction...

GoPro Stock Is Down Following Earnings Disaster

Trading in GoPro stock was halted at the request of the company ahead of its Q3 release after Thursday's close. When shares resumed trading, the GoPro stock price crashed 22%. To put that in perspective, GoPro lost $250 million in value in a matter of minutes. GoPro's market cap dropped to $972 million from $1.23 billion following the results.

The maker of action cameras said its net income declined 330% year over year (YOY), as it swung to a loss of $84 million, or a -$0.60 per share. Analysts were looking a loss of $0.36.

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GoPro's Q3 sales totaled $241 million. That was down a sharp 40% YOY and was well short of the estimate for $313 million. The dispiriting numbers reflect weak demand for GoPro's cameras. The company sold slightly more than 1 million cameras in Q3.

The company explained that production issues resulted in lower launch volumes. Those glitches will have a negative impact on results in the current quarter, too. Compromised production has hampered its re-stocking channels, and that will make it difficult for GoPro to meet demand in Q4.

The fourth quarter is crucial for retailers and makers of consumer electronics because their products are favorite holiday gift items. For many retailers, Q4 is a make or break quarter. While GoPro has several new items set to launch, it's warning it will have a difficult time getting them to consumers.

That puts a damper on expectations for its new product category. In September, GoPro unveiled its first drone called Karma.

And the earnings numbers aren't the only reason GoPro stock is down. Guidance looking forward is also making investors panic today...

Why We're Still Avoiding GoPro Stock

GoPro expects earnings per share (EPS) between $0.25 to $0.35 on revenue of $600 million to $650 million in Q4. That's compared to Capital IQ consensus forecasts for EPS of $0.45 on revenue of $669.83 million.

For the full year, GoPro issued downside revenue guidance between $1.25 billion and $1.30 billion. That's below prior guidance of $1.35 billion to $1.50 billion. It's also below Capital IQ's estimate for $1.39 billion.

We've been bearish on GoPro stock since its highly anticipated IPO.

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On June 25, 2014, GoPro sold 17.8 million shares to initial investors at $24 apiece. That was at the high end of the $21 to $24 range. GoPro debuted with a market value of $2.95 billion.

GPRO shares jumped right out of the gate. They logged a 55% gain to $38 a share on GPRO's first day trading as a public company. Shares rallied over the next several quarters, eventually reaching a high of $93.85.

At its all-time October 2014 high, Money Morning Chief Investment Strategist Keith Fitz-Gerald warned investors to not buy into the hype.

By August 2015, the GoPro stock price had slid to $60.

"GoPro makes some really cool products, and they've got a rabid fan base of people who film themselves and others doing some truly outrageous things," Fitz-Gerald said. "But that doesn't mean they've got sustained profit potential. The company has engaged in deep, deep discounting this holiday season, and that's going to eat into margins."

Fitz-Gerald also explained there is no reason to buy GoPro stock even though its shares are cheap. Cheap stocks are usually cheap for a reason.

"I'm always willing to pay up for a company that's 'best in class' or that has a defensible technology. GoPro has neither," he continued. "I won't hesitate to line up for a stock that's got control over its margins and, by implication, the pricing power to go with it. GoPro doesn't."

There has been chatter that GoPro is a takeover candidate. With shares down 44% year to date and 72% over the last three years, GoPro stock certainly looks vulnerable. But as Money Morning has repeatedly cautioned, it's never prudent to buy a stock on takeover speculation alone.

With the GoPro stock price going in the wrong direction, we continue to sit this one out.

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